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Waters Are Rising For Some Borrowers

Student loan debt forgiveness proves not to be very forgiving

Lew Sichelman headshot
Lew Sichelman
Waters are rising for borrowers

How are we going to keep people in their homes when things are crumbling all around them?

By things, I mean rising cost of home owners insurance, if they can find coverage at all. I mean student debt payments many owners thought they’d never have to pay back, only it turns out that they do, at least for now.

Last month in these pages, I focused on the often overlooked — but ever increasing — costs of owning the roof over your head, mentioning insurance as but one item. But I covered it almost in passing, in just two paragraphs, noting that premiums rose 11% in 2022. And with major carriers pulling up their skirts in high-risk states and high-tailing it out of town, rates are poised to rise even higher moving forward.

But I did not mention student loan debt at all. After a three-year hiatus on repayments thanks to relief granted during the pandemic, monthly bills resumed last month. So let’s start there. Does the word crisis mean anything to you?

Not Done Yet

According to the American Enterprise Institute, some $317 billion in student loans has been forgiven through the second quarter. That’s billion, with a capital B. And it’s not a future prediction. It’s what’s already gone out the door. By comparison, it’s a third of last year‘s military budget and three times what Uncle Sam spends of education.

While you’re trying to wrap your head around that number, also consider this: The Biden Administration doesn’t seem to be done. This summer, The White House said it will make $19 billion more in forgiveness from a one-time adjustments to the Income Driven Repayment Account, an adjustment the AEI says “substantially alters” the terms of the repayment formula. And it continues to push blanket forgiveness, which the Supreme Court has ruled against.

To paraphrase Everett Dirksen, the Republican Senator from Illinois and perhaps the last great Capitol Hill orator, a billion here, a billion there, and pretty soon you run into big money.

I’m not saying student debt forgiveness is good or bad, it just is — or will be. But some of the 37 milllion beneficiaries of the temporary pardons will not be able to pay it back. Especially if they have a mortgage, pay rent and/or have other debt. Even before payments resumed last month, some folks were struggling. And more than a third had not put any money away to make payments once they began.

According to a Harris Poll study on behalf of Credit Karma, nearly half the some 400 participants with student debt were already scrambling to cover their auto loans, credit card payments, and house payments even before forbearance ended. That’s also even though they hadn’t been making any payments on their student debt.

This isn’t about lending these people money to buy a house, although it most certainly applies. Rather, it’s about keeping them in the houses they already financed. After all, about 18% of everyone have student debt, either for themselves or a child, and three out of four of those also are on the hook for supporting their families as well as their educations.

‘Get In Front Of This’

As I pound away on my trusty keyboard, the foreclosure numbers look pretty good. Fannie Mae says serious delinquencies were down in July from a year ago. And ATTOM recorded a slight decline in new filings in July. Better yet, all but the most recent buyers have tens of thousands in equity to fall back on. But according to the Credit Karma poll, October was the first time a third of the respondents ever had to make a student debt payment.

In some cases, their student loan payments are more than their house payments. Bloomberg found two such families. One, a physical therapist in Kentucky and his wife, have $94,000 in debt from their undergraduate and graduate studies. Their monthly payment on that debt load is $1,140, or almost $300 more than on the payment on their $207,000, 3.25% mortgage they took out in 2020. The other, a Lexington, S.C., attorney, and his bride, faces a $2,100 a month payment for their school loans compared to $1,850 house payment for the $346,000 house they bought with 3.2% financing, also in 2020.

The message here is that lenders — but especially loan services — have to get in front of this before it bites them in the keister. As Bloomberg reported, “experts have predicted a wave of delinquencies … as debt payments further stretch household budgets.”

Breaching Contracts

Now let’s take a deeper dive into homeowners insurance. And to do that, we must first consider climate change.

As I type this in September, there already have been more billion dollar weather events — again that’s a capital B — than in all of last year. A firestorm that wiped out an entire Hawaiian town. A rare hurricane in Southern California, on top of a not-so-rare earthquake. The usual number of deadly tornados in the Midwest. A hurricane that hits Florida’s Big Bend region for the first time ever.

No wonder insurance companies are pulling in their horns, especially in California, Louisiana and Florida, where some have stopped writing policies altogether. In the Golden State, State Farm, the state’s largest insurer, and Allstate have said goodbye. In Florida, Farmers Insurance have joined those two in bidding adios.

Next in line? Who knows. But almost everywhere else, insurers are hiking their rates to compensate for big losses. Owners in Washington, Montana and Colorado are seeing their coverage options shrink, according to a Washington Post report. And the Wall Street Journal says that within the last year, double-digit rate increases have been approved in 31 states, six of which have okayed increases of 20% or more.

Life preserver for home loans

The situation is such that many people are going “commando,” dropping coverage altogether. In effect, they are self-insuring, betting that they can dodge the next calamity or cover whatever loses they may incur out of their own pockets. Those without a mortgage can get away with that. But those with a loan are breaching their contracts and their servicers can call the loans due and payable.

That, of course, is a drastic step. Before that, servicers can demand that borrowers obtain coverage. And if borrowers don’t, they can “force-placed” coverage. Such insurance will protect the property, the owner and the investor, but it is sometimes not nearly as comprehensive as what the borrower can find on his own. Not only do they often not include personal property or liability protection, such policies are likely to be much more expensive, which will simply exacerbate the borrower’s difficult financial situation.

Escrow Waivers

No one knows for certain how many borrowers with a mortgage elect to pay their insurance and property taxes on their own rather than submit them on a monthly basis along with the principal and interest on their loans. The Mortgage Bankers Association doesn’t “even know how that data point would be tracked,” spokesman Adam DeSanctis told me in an e-mail response to my query. “I’m not aware of someone tracking escrow waivers or even surveying servicers on this.” But the Insurance Information Institute estimates that the number of those who elect to drop coverage has risen from just 5% in 2016 to 12% today.

All of this begs the question, what can not just servicers but the entire mortgage community do to help borrowers who find themselves overwhelmed? And the answer isn’t that difficult.

“Get ahead of the situation,” advises Jane Mason of Clarifire, the workflow automation and technology company based in St. Petersburg, Fla. “You have to be proactive. You owe it to everybody to be really proactive.”

When it comes to insurance, tell people not to panic, but to start searching for replacement coverage right away. Most states require that insurers provide an advance notice of cancellation — 120 days in Florida and 75 days in California — but those days can go by pretty quickly. So the sooner the search begins, the better.

Some people will hunt for another insurer on their own. But an independent agent who works with multiple companies can take over the leg work. I used such an agent when coverage was dropped on my Florida residence, and she found a replacement policy that was actually less expensive than the original one.

Under a worst case scenario, some states offer coverage through state-run companies for consumers who can’t find coverage from a private company. Although it was meant to be a backstop for home owners, Florida’s Citizen Property Insurance Corp. Is now the Sunshine State’s largest insurer.

As far as student loans are concerned, reach out to every owner on your books, advising them that if they have such debt, you’re here to help. “Think of yourselves as rapid responders,” Mason of Clarifire advises.

Once you aggregate that group, use your technology to target it with a specific campaign.

You might be able to offer borrowers the chance to consolidate their school loans into their mortgages, perhaps at a better rate then they have now. Or perhaps you can direct them to government sites (see sidebar) that suggest ways out of their dilemmas.

Above all, though, “communicating is very important,” says Mason. “Use your marketing teams to create outreach programs and use your technology to offer rapid responses.”

Freddie Weighs In On Student Debt

Freddie Mac has updated its guidance on how to handle student debt loan payments for would-be borrowers with education loans.

Effective as of early September, lenders must specify an amount greater than zero when calculating the borrower’s debt-to-income ratio. Even loans with income-driven repayment plans must state something other than zero.

For student loans in deferment, forbearance or repayment, including income-driven plans, if the monthly payment is greater than zero, lenders must use that amount unless other documentation supports a different figure. If the payment is zero, 0.5 percent of the outstanding loan balance must be used, according to the Freddie’s Seller-Servicer Guide.

However, education debt may be excluded from the DTI calculation if the borrower has 10 or fewer payments left until the balance is paid in full, forgiven, canceled or otherwise discharged AND the borrower is eligible or approved for forgiveness, cancellation or, in the case of an employment-contingent repayment program, there is no evidence the borrower will become ineligible in the future.

As of this writing, Fannie Mae has not weighed in on how it wants its sellers to handle student debt.

Helping Borrowers With Student Debt

The Biden Administration is hoping a new income-driven federal student loan repayment plan will ease the transition for at least some of 28 million borrowers who had to start repaying their loans in October

The SAVE (Saving on a Valuable Education) plan reduces repayment amounts compared to previous income-driven plans. It allows borrowers to make monthly payments based on both their incomes and family sizes, with any remaining balances forgiven at the end of the 20 to 25-year repayment period.

For typical community college borrowers with up to $12,000 in outstanding loan balances, SAVE reduces the time to forgiveness to as little as 10 years. It also ensures that enrolled borrowers who make their payments on time do not incur growing loan balances because of accrued interest.

At the same time, the U.S. Department of Education has begun automatic discharges for 804,000 borrowers who qualify for a portion of the $39 billion in relief made available because of “fixes” earlier this year to IDR plans.

The discharges are meant for borrowers who never received the amnesty they earned after making payments for decades. Borrowers who have accumulated the equivalent of either 20 or 25 years of qualifying months are eligible.

Meanwhile, there are options for repaying both federal and private student loans, though they are somewhat different for each category. Savvy servicers will find out what they are and notify their borrowers about them. But at the very least, they should tell people where to find them – or

Federal loans offer a variety of income-driven repayment (IDR) plans that base payments on the borrower’s income and household size. The Department of Education’s loan simulator can help people pick a plan that best meet theirs needs.

Those with private loans must ask for relief. Private lenders are not required to grant respite, but if your investor is amenable, advise borrowers they will have to show proof of hardship and how much you can safely afford to pay.

Also advise borrowers they needn’t pay for assistance in figuring out how to proceed, More than a few people have been scammed into paying hefty fees for what should be a free service. Recently, the Federal Trade Commission and the U.S. Department of Labor started sending payments totaling more than $9 million to 22,500 consumers who lost money to a company operating a bogus student debt relief scheme. The outfit’s owner was convicted on criminal charges in connection with the dodge.

This article was originally published in the NMP Magazine November 2023 issue.
Lew Sichelman headshot
Lew Sichelman,
National Mortgage Professional Contributing Writer

Lew Sichelman has been covering the housing and mortgage sectors for 52 years. His syndicated column appears in major newspapers throughout the country. He also has been the real estate editor at two major Washington, D.C., dailies and spent 30 years on the staff of National Mortgage News, formerly National Thrift News.

Published on
Nov 02, 2023
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